If you let your property to several tenants who are not members of the same family, it may be a ‘House in Multiple Occupation’ (HMO). Continue reading to find out more about HMOs and the records you need to keep.
What is a House In Multiple Occupation (HMO)?
Your property is a HMO if both of the following apply:
- At least 3 tenants live there, forming more than one household
- Toilet, bathroom or kitchen facilities are shared
You would need an HMO Licence if there are five or more tenants from at least two living within HMO.
Cash basis is generally used for most property income by individuals or partnerships whose income is £150,000 or less for a tax year.
For companies, rental income and expenditure is assessed as trading income, and the same tax treatment applies to HMO’s and multi-lets. However, property businesses must calculate their profits in accordance with Generally Accepted Accounting Principles (GAAP). In other circumstances, property businesses can elect to use GAAP (rather than cash basis).
Expenses and Houses in Multiple Occupation
Houses in Multiple Occupation (HMO) and multi-lets often require improvements and repair work to optimise their maximum rental yield or meet standard letting requirements. The tax treatment of those expenses could be varied, with some available to be offset against regular rental income, whilst others could be treated as capital expenses (available to be offset against the capital gains when the property is sold). However, some in the latter case could still attract capital allowances, meaning the expense could get some earlier tax relief (e.g. where the expense relates to a qualifying item in the communal area).
Recognising the type of expense could be straightforward in some cases. However, this isn’t always the case.
Generally, it is the scope of work that defines its type. For example, whether the expense is a standard or major repair or changes the item’s characteristics.
HMRC recognise that if expenditure changes the character of the thing being repaired, it must be classified as a capital improvement and not a repair. A fair apportionment of expense between capital and revenue is possible where it meets the relevant definition.
For example, if a property requires some work to be done before it can be let on the open market, these expenses can’t be treated as revenue expenses. Instead, you can add the expenses to the initial cost of the property acquisition and deduct it against capital gains where the property is sold later.
On the other side if you replace the carpet in the property, you may treat that as a revenue expense, but not if you are replacing it with the wooden floor.
Losses for HMOs could be offset against the income from some other rental income.
Record keeping
Keeping up to date records is essential if you’re letting Houses in Multiple Occupation.
Here are some tips:
- Make sure you keep record for each tenant and the amount they pay.
- We suggest keeping a detailed record of any work carried out with its certain stages (including photographs). You can also request constructors to provide you with breakdown of invoices and a brief description of work carried out.
The rules about HMOs are different in Scotland and Northern Ireland.
Contact Fusion Business Services today
We provide specialist landlord accountancy services, including a dedicated service for Special Purpose Vehicles and for landlords who manage their buy to let portfolio with self-assessment. For more information, please give us a call on 0800 2294020 or complete the short form on this page. Alternatively, you can request a free consultation at a convenient time.
